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July 2018

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Refinery Restart Awaits Legislative Approval in the U.S. Virgin Islands

A $1.4-billion investment from ArcLight Capital Partners and Limetree Bay Terminals promises 700 new jobs and new revenue streams in the hard-hit U.S. territory.

The refinery Hess opened in 1967 and closed in 2012 could soon reopen with a $1.4-billion, 700-job investment if the U.S. Virgin Islands Legislature approves a plan put forward later this month by U.S. Virgin Islands Governor Kenneth E. Mapp.

Photo courtesy of U.S. Virgin Islands Economic Development Authority

by ADAM BRUNS

Distilleries and refineries have a lot in common. In the case of the U.S. Virgin Islands (USVI), what works for rum could work for oil too. In a word: Rebirth.

St. Croix is the home of the Captain Morgan distillery (owned by Diageo) in Christiansted and the Cruzan distillery in Frederiksted. Diageo pledged a decade ago to build its plant there, and both companies received incentives for distillery investments around that time. Diageo last year pledged $1 million to USVI hurricane recovery. Cruzan reopened for production last fall after sustaining damage from those hurricanes, and early this year created the Island Spirit Fund to assist in disaster relief efforts in the USVI and across the United States, donating $1 from every case of Cruzan rum sold.

"Last year, our home island of St. Croix faced many challenges in the devastating wake of Hurricane Maria, but the resiliency of the Crucian people and our sense of community never wavered," said Gary Nelthropp, Cruzan Rum's master distiller and a descendant of the original Nelthropps who established the rum operation there eight generations ago.

Now the distillation of petroleum products may be renewing its presence on the island too.

Over 50 years ago, Hess Oil & Chemical completed construction of a large refinery on St. Croix. Twenty years ago, the company formed a partnership with Venezuela's national oil company, Petroleos de Venezuela, and renamed the facility HOVENSA. Then, in 2012, HOVENSA announced it would close the refinery, which at one time was one of the 10 largest crude oil refineries in the world.

This diagram from a new report on supply chains from the American Fuel & Petrochemical Manufacturers shows the integral role of major refineries in supporting an immense economic ecosystem.

Infographic courtesy of American Fuel & Petrochemical Manufacturers

It was a good thing for Hess's sustainability profile, as the company noted in its annual report, "Our year-over-year net equity emissions decreased by more than one million tonnes CO2e, primarily due to the closure of the HOVENSA joint venture refinery in early 2012."

But it wasn't so good for jobs. That might be about to change.

On July 2, U.S. Virgin Islands Governor Kenneth E. Mapp announced an agreement which would reopen that refinery, creating hundreds of jobs while also shoring up the solvency of the Government Employees Retirement System (GERS). The agreement is between the Government of the Virgin Islands and ArcLight Capital Partners, LLC, the owners of what is now called Limetree Bay Terminals. The company will invest approximately $1.4 billion to refurbish the refinery. That means more than 1,200 local construction jobs over the next 18 months.

"Once refinery operations commence at the end of 2019, as many as 700 permanent jobs will be created," said the government's announcement. "The new jobs will be in addition to the more than 750 jobs now at the terminal storage facility. The initial refining operations provide for the processing of approximately 200,000 barrels of crude oil feedstock per day."

Mapp said the investment will also help fund a new 110-room, upscale lifestyle hotel from a major four-star brand on St. Thomas.

Mapp has called the Virgin Islands Legislature into special session on Wednesday, July 25, 2018, to consider and ratify the agreement. "This landmark deal to jumpstart our recovery and to pave the road to better times … requires us to move expeditiously if the refinery is to restart on schedule," he said. "I look forward to working with members of the Legislature and our partners at Limetree Bay to realize its potential for the benefit of all of our people."

Nuts and Bolts

Two years ago, the government entered into an agreement with Limetree Bay Terminals, LLC, for the operation of the oil storage terminal at Limetree Bay. The Legislature ratified that agreement, and the terminal now employs more than 750 full-time people, more than 80 percent of whom are Virgin Islanders. Limetree is paying more than $11 million annually in taxes to the government, has invested approximately $260 million in capital improvements to its facility and is in the final stages of a $100-million capital project, building the single-point mooring buoy that will allow it to handle the world's largest tankers.

According to the new agreement, upon the closing of the transaction, ArcLight Capital will make a $70 million closing payment to the Government of the Virgin Islands. The payment includes $30 million for the purchase from the government of approximately 225 acres of land and 122 homes. "This property was acquired as part of the government's settlement of certain claims against HOVIC, Pedevesa de Venezuela, Hovensa and Hess Oil Corporation," said the government. "The government will retain the vocational school and more than 350 acres of land it had received in that settlement. The closing payment also includes a $40 million prepayment of taxes by a new refinery entity created by ArcLight Capital to operate the refinery.

U.S. Virgin Islands Governor Kenneth E. Mapp

Photo courtesy of U.S. Virgin Islands Government House

"Once refinery operations commence and after crediting the $40 million of prepaid taxes, Limetree will make annual payments to the government in lieu of taxes at a base rate of $22.5 million a year. With market adjustments based on the refinery's performance, this could increase to as much as $70 million per year, but will not fall below $14 million a year."

According to industry experts and consultants Gaffney, Cline & Associates, the government expects to receive more than $600 million over the first 10 years of the restart of the refining operations. This income is in addition to the $11.5 million currently flowing to the government from the oil storage terminal each year.

"For comparison sake, in the over 30 years that Hess Oil operated the refinery on the island of St. Croix, the company paid approximately $330 million in corporate taxes to the government," Mapp said. "As you may recall, in 2015 Hess Oil filed suit for the return of (those tax payments)," Governor Mapp pointed out.

The proposed legislation provides that 50 percent of the annual revenues from the refining operations go directly to GERS. The anticipated payments over the first 10 years amount to $300 million. The Governor's bill also provides for the purchase from GERS of the Havensight Mall and the ground lease of the Port of Sale property. In addition to this purchase, the bill provides that GERS will receive 50 percent of the annual net revenues from the mall and the ground lease. The Public Finance Authority (PFA) will take ownership of these properties, and the Authority's subsidiary, The West Indian Company (WICO), will fully manage and develop these properties.

From the closing payment and new revenue streams generated by investments made possible by this transaction, the PFA will make a $25 million down payment to GERS and enter into a mortgage with GERS at a rate of 8 percent per annum, which is above the pension system's required rate of return, for the balance of the agreed purchase price of these assets.

"Acquisition of these assets by the PFA and WICO will allow the government to enter into an agreement with the Territory's cruise partners or others to fully develop and leverage these assets to generate a much higher degree of revenue for GERS and the government," said the government statement. In addition to the $25 million cash injection, the mortgage payments, 50 percent of the mall revenues and half of the annual payments from the refinery, will be dedicated to GERS.

"All together, based on (estimates from) our industry consultants, these measures will generate more than $380 million into GERS over the next 10 years," said Governor Mapp.

"This landmark agreement did not happen overnight," Mapp continued. "It is the result of much hard work by the owners of ArcLight Capital and my Administration over the past two years. It is the product of complex negotiations with major players in the global oil industry. It required tremendous work with the Trump Administration and the President's Council of Environmental Quality, the EPA (United States Environmental Protection Agency) and the U.S. Department of Justice. More work remains to be done, but this agreement allows the Virgin Islands to accelerate its recovery, grow its economy, create jobs for its people, propel new startup businesses, as well as support existing businesses and ultimately provide revenues for our government and our retirement system."

Mapp noted ArcLight Capital's plan anticipates a massive capital investment in a compressed period of time in order to capture a market opportunity in the oil industry.

"Timing is of the essence in completing the turnaround and restart of the refinery," he said. "The objective of the overall strategy is to have refined product from the St. Croix refinery in the market come January 2020."

In addition to the $1.4 billion and 700 new permanent jobs from the proposed investment, the Amended Terminal Operating Agreement and Refinery Operating Agreement may bring an estimated $775 million in revenues to the government over the next 10 years, of which more than $600 million will be new revenues generated entirely by the refinery.

Meanwhile, recovery continues. U.S. Department of Housing and Urban Development (HUD) Secretary Ben Carson on July 10 announced he is approving a disaster recovery plan to help USVI citizens recover from Hurricanes Irma and Maria. In November, HUD allocated $243 million to the USVI to support long-term recovery efforts. Among the planks is $33 million for economic revitalization, including $23 million for ports and airports; $5 million for workforce development training; and another $5 million (requiring a waiver by HUD) "for marketing to communicate that the USVI is open for business."

Non-petroleum energy sources are coming to the fore on the islands too. According to a report issued in late June by the USVI Hurricane Recovery and Resiliency Task Force, the U.S. Government "has already spent more than $600 million on restoring the Virgin Islands electrical system and has authorized the investment of another $572 million. The new power system, to include wind and solar farms, will significantly reduce the cost of power going forward, the Governor said.

"The more we come off of fossil fuel, the more we move away from the uncertainty of oil prices," he said.

Adam BrunsManaging Editor of Site Selection magazine

Adam Bruns has served as managing editor of Site Selection magazine since February 2002. In the course of reporting hundreds of stories for Site Selection, Adam has visited companies and communities around the globe. A St. Louis native who grew up in the Kansas City suburbs, Adam is a 1986 alumnus of Knox College, and resided in Chicago; Midcoast Maine; Savannah, Georgia; and Lexington, Kentucky, before settling in the Greater Atlanta community of Peachtree Corners, where he lives with his wife and daughter.

The Site Selection Energy Report features exclusive and in-depth reporting and analysis on the most important energy projects and energy policy issues impacting the world of manufacturing and industrial real estate. Topics covered include oil and gas projects, investments into alternative energy installations and R&D, tax credits and financing, electric utility issues and much more.